Market Strategy - July 2021

JULY 2021
MARKET
Strategy
Domestic and State of Domestic Receding cases

International Events Economy of Covid 19
Valuation & Top Investment

Outlook Ideas
Market Strategy
July 2021
Amit Agarwal, CFA

agarwal.amit@kotak.com
MARKET OUTLOOK FOR JULY 2021
+91 22 6218 6439
The broader sentiment continues to remain directionless in the absence of any significant
Shrikant Chouhan developments in terms of macro-economic factors. The benchmark indices are more or less
shrikant.chouhan@kotak.com range bound because of the confidence around the growth and progress of India which
+91 22 6218 5408 balances out the uncertainty around the third Covid wave. And rightly so, India has witnessed
an increase in forex reserves to $608 Bn (Source: RBI) which can provide economic and trade
comfort for a couple of months. Better-than-expected GDP data, positive IIP performance and
GST collections being maintained over a Lakh cr mark, all indicate that the Indian economy is
exhibiting necessary resilience. Our KIE team now expects, Indian GDP to grow at 9.0% in FY22
and 6.5% in FY23. Even the global economy remains on solid ground, with Europe picking up
the recovery. US and China growth may have peaked, but the euro area and emerging markets
(ex-China) are picking up momentum.
In US, the Fed was categorical in mentioning that it will not raise interest rates pre-emptively
because it fears the possible onset of inflation and will wait for evidence of actual inflation or
other imbalances. Accordingly, the bond markets have passed judgment on US inflation - they
believe it is transitory. A mix of supply chain bottlenecks, pent-up demand from re-opening,
and labour supply constraints should keep US inflation high in 2021. But these factors should
fade with time; and we expect year-over-year core PCE inflation to fall next year.
In other global news, the rally in metal commodities which started back in 2020, has taken a
hit. Talks from Chinese authorities hinting towards inflationary control measures and US’
hawkish stance on interest rates are causing the retracement in metal prices. Key question
here is: whether the near term correction is a minor hiccup in the super cycle as commodity
prices have gone into a new zone? But one thing is clear that the exemplary growth in
commodity prices might not continue at the same pace going forward. Investors can therefore
maintain a wait and watch approach and instead of just relying on the commodity price
movements it is essential to observe the deleveraging unfolding on the balance sheet,
utilisation of capital and free cash flow trend of companies.
In other domestic economy data, May CPI inflation rose sharply to 6.3% (Kotak: 5.35%, April:
4.23%) amid growing momentum. We now expect headline CPI inflation to average 5.5% in
FY22. Amid favorable base effects, April IIP registered an uptick of 134% (Kotak: 116.1%,
March: 24.1%) despite a fall in momentum owing to state-wide lockdowns. Amidst inflationary
risk, growth uncertainties will hold back the Monetary Policy Committee (MPC) from changing
the monetary policy stance in the August policy, we do not rule out a split in the voting pattern
given that economic activity is expected to improve going ahead.
On the fund flow front, after remaining net sellers for two months in a row, foreign portfolio
investors (FPIs) in June 2021 turned net buyers by pumping in a net Rs 17,215 cr into Indian
markets in the equity segment as per data from depositories. Prior to this, FPI had pulled out
Rs 2,954 cr in May and Rs 9,659 cr in April from the equity segment. The inflow is due to
favourable global cues and improving outlook for the Indian economy amidst a sharp fall in
the number of COVID-19 cases, easing of lockdown restrictions in some parts and a pick-up in
vaccination.
Government in its economic review report stated that frontloading of fiscal measures would
be essential to revive consumption and investment in the coming quarters. They also added
that economic fallout from the second wave may be restricted to just Q1FY21, but uncertainty
around the third Covid wave exist.
Kotak Securities – Private Client Group Please see the Disclosure/Disclaimer on the last page For Private Circulation 2
Market Strategy
July 2021
In Covid Update, a total of 33.28 cr vaccine doses have been administered till June 29 (27.4 cr
first dose and 5.88 cr second doses). Covid Cases have receded to ~50,000 per day from peak
of ~4,00,000 per day. The pace of vaccination has also picked in the last 10 days to an average
of 60 lakh doses (from 25 lakh) administered per day. The Central Government is expecting to
get around 188 crore vaccine doses - from at least five manufacturers including Covishield,
Covaxin, Bios E Sub Unit Vaccine, Zydus Cadila DNA vaccine and Sputnik V - to inoculate the
entire adult population by the end 2021. Government is also making efforts to procure vaccines
available outside India such as vaccines of Pfizer, Johnson & Johnson, Moderna etc.
Earnings Outlook
4QFY21 net profits of the Nifty-50 Index increased 143% yoy versus our expectation of 130%
increase and EBITDA of the Nifty-50 Index increased 76% yoy versus our expectations of 70%
increase. Our FY22E and FY23E net profits of the Nifty-50 Index are higher by 6% and 3%
respectively, compared to the start of the 4QFY21 results season. However, the entire earnings
upgrade has come from global commodity sectors. We expect net profits of the Nifty-50 Index
to grow 31% in FY22 and 14% in FY23, but we see downside risks. FY21 net profits increased
24%. Banks and metals & mining are expected to provide bulk of the incremental profits for
Nifty-50 in FY22. The strong growth in net profits of the market over FY21-23 may look
surprising, but the growth reflects low base of FY21 in a few sectors and the composition of
the Indian market, especially the benchmark indices.
Outlook and Valuation

At current levels of 15,721 the Nifty-50 is trading at 22.1x on FY22E and 19.4x on FY23E. From
now till end of FY22, we expect modest returns from Indian market considering strong
economic recovery and gradual increase in global and domestic bond yields. Equity markets
will have to adjust to the reality of higher interest rates as central banks start to execute their
‘exit’ plans for their ultra-loose monetary policies over the next few months.
Off late, sectors such as entertainment, aviation, malls and hospitality & leisure have remained
in focus just because of talks around loosening of restrictions in some states. Investors should
maintain a safe distance from stocks rising on irrational exuberance. It would be prudent for
investors to ride the bull wave in fundamental resilient companies only and avoid temptation
in weak fast moving stocks. Defensives sectors like FMCG, Pharmaceuticals and IT Sector may
act as a protection or safety net as their valuations are already very rich.
As most sectors and pockets have seen rally on a rotation basis there are only handful of
stocks in each sector where there is scope of making money. One can look at select stocks
from each sector where earnings growth is likely to be high and valuations are reasonable. It
is going to be a stock pickers market from here on.
By the end of FY22 investors would start discounting FY23 earnings. Considering 300-400 bps
premium of equity PE over bond PE we can justify Fwd. PE of 19-20x for Nifty-50. On FY23E
EPS of Rs.813 we can expect Nifty-50 to end FY22 somewhere ~16,500 (+/- 500 points). Similar
level of Sensex by end of FY22 could be ~55,000 (+/- 1700 points). It will be a good buy on dips
market as earnings growth is likely to remain very high FY21-23E. Investors will need to have
a 2-3 year time horizon as one year returns may not be lucrative, considering the sharp run-up
already seen in the last one year.
Market Strategy
July 2021
Risk & Concerns

 Any surge in Covid-19 cases led by third wave of the pandemic could pose near-term risk to
earnings.
 Massive stimulus and economic recovery has led to rise in commodity prices. This may
result in cost pressure risk to earnings.
 Rising Inflation can force central banks to halt easy monetary policy.
 Any sharp rise in bonds yields could result in de-rating of equities.
TOP INVESTMENT IDEAS

Price Fair Upside Mkt EPS
Rating (Rs)* Value (%) cap. EPS (Rs) growth (%) P/E (x) P/BV (x) RoE (%)
Company (Rs) (Rs Cr) FY22E FY23E FY22E FY23E FY22E FY23E FY22E FY23E FY22E FY23E
HCL Technologies ADD 984 1,080 9.8 2,66,889 51.2 56.9 6.6 11.0 19.2 17.3 3.8 3.3 21.0 20.4
ICICI Bank BUY 631 710 12.5 4,36,861 32.9 36.1 40.5 9.9 19.2 17.5 2.8 2.5 14.6 14.3
LIC Housing Finance ADD 470 600 27.7 23,719 54.5 66.9 0.6 22.8 8.6 7.0 1.4 1.2 13.1 13.7
NCC BUY 87 105 20.7 5,312 6.0 9.0 39.5 50.0 14.5 9.7 0.9 0.9 6.6 9.3
SAIL BUY 131 170 29.8 53,939 37.7 19.8 280.4 -47.4 3.5 6.6 0.9 0.8 29.6 13.0
Sun Pharmaceuticals ADD 675 740 10.0 1,62,059 25.3 30.1 2.8 18.9 26.7 22.4 3.1 2.8 12.4 12.6
Source: Kotak Institutional Equities Research; *The above valuation summary is based on closing prices as on 30th June 2021.
Global Indices Performance (in %) – Q1FY22
MSCI World 5.8%

MSCI EM 4.5%
S&P 500 5.8%

Dow Jones Indl 4.7%
NASDAQ COMP. 3.8%
France 6.3%
UK 4.6%
Germany 2.8%
S&P BSE SmallCap 14.3%

NIFTY Midcap 100 8.8%
Nifty 50 6.1%
BSE Sensex 4.9%
Brazil 8.2%
Russia 5.1%
Shanghai 5.0%
S.Korea 4.7%
Taiwan 3.9%
Hong Kong 2.7%
Thailand 0.4%
Singapore 0.0%
Indonesia -0.6%
Japan-1.1%
-2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%
Source: Bloomberg, Kotak Securities – Private Client Group
Market Strategy
July 2021
Sectoral Indices (% change) – Q1FY22
BSE METAL 31.5%

BSE Healthcare 15.0%
BSE Utilities 12.7%
BSE OIL & GAS 11.1%
BSE Energy 9.8%
BSE Industrials 9.3%
BSE BANKEX 7.4%
BSE CAPITAL GOODS 6.6%
BSE AUTO 5.8%
BSE IT 3.9%
BSE Telecom 3.9%
BSE FMCG 2.0%
BSE CONSUMER… 1.7%
BSE REALTY 0.4%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%
Commodity Performance (% Change) –Q1FY22
Gold (US$/oz) -7.9%
Copper (US$/ton) -5.3%
Silver (US$/oz) 0.0%
Aluminium (US$/ton) 5.4%
Brent crude (US$/bbl) 11.9%
Richard Bay coal (US$/ton) 22.3%
-35.0% -25.0% -15.0% -5.0% 5.0% 15.0% 25.0% 35.0%
Dated: 30th June 2021
HCL Technologies (HCLT) – ADD
Company Update
Current Market Price (CMP) Target Price
Rs.984 Rs.1080
Our fair value of Rs. 1,080 implies an upside of 9.8% from the current market price.
Rationale:
• 2nd Covid wave will have impact on Q1FY22; not too different from competition.
• Healthy pipeline provides comfort on growth.
• Talent shortage - temporary and manageable.
• We expect earnings to grow by 6.6% in FY22E and 11% in FY23E.
• The stock trades at inexpensive 17.3x FY23E earnings and is attractive.
Company update:
Positives:
• Cloud migration is a net tailwind to IMS.
• Winning in applications through differentiated approach.
• Increased investments in digital engineering for growth acceleration in ERS.
• Products will be a growth business.
ERS: Engineering and R&D Services. IMS: Infrastructure Management Services.
Negatives:
• ERS business declined 4.9% (c/c terms) in FY21.
Click here For detailed report dated 9th June 2021. Note: CMP & valuation may differ due to difference in dates.
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This is a synopsis of the Research report issued by Kotak Securities Limited. This is not a comprehensive report
and before taking any investment decision we request you to refer the detailed report including disclaimers by
clicking here: https://www.kotaksecurities.com/ksweb/ResearchCall/Fundamental. Further, the recipient of this
material should take their own professional advice before investing.
Holding Period: 12 months. Disclaimer: http://bit.ly/2n5AxIE
Dated: 30 June 2021
ICICI Bank (ICICIBC) – BUY
Result Update
Rs.631 Rs.710
We see 12.5% upside in the stock at our Fair Value of Rs.710
Rationale:
• Ticking all the right boxes & delivering a solid growth in a challenging environment.
• Normalcy on return ratios for FY22-23 is now a high probability.
• ICICIBC is likely to recover from the Covid episode faster than most players.
• ICICIBC trades at par with peers & 2.5X FY23E book value.
• We value ICICBC at ~2.3X book & 16X FY23E EPS for RoEs of ~15% levels.
(RoEs - Return on equities)
Q4FY21 Earnings update:

Positives:
• Stellar 3.6X yoy earnings growth on the back of 16% yoy operating profit growth.
• Solid recovery in loan growth at 14% yoy & healthy NIM profile at 3.7%.
(NIM – Net Interest Margin)
• GNPLs declined 0.5% qoq to 5% & NNPL ratios declined 0.1% qoq to 1.2% of loans.
(GNPL – Gross non-performing loans; NNPL – Net non-performing loans; NPL – Non-performing loans)
• Deposit growth healthy at ~21% yoy with best-in-class funding costs at less than 4%
Negatives:
• Slippages were higher in 2021 & recoveries were lower due to pandemic.
• Credit cost ratio increased in FY21 (Management expects normalized level of 1.2-1.3%).
Click here For detailed report dated 25th April 2021. Note: CMP & valuation may differ due to difference in dates.
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Holding Period: 12 months / Disclaimer: http://bit.ly/2n5AxIE
LIC Housing Finance (LICHF) – ADD
Result Update
Rs.470 Rs.600
Our fair value of Rs.600 implies upside of 27.66% from current market price.
Rationale:
• Buffering up rapidly provides some comfort.
• Significantly high stress; more to come.
• LICHF to deliver 15% EPS CAGR during FY22-24E, RoE of 13-14% and 1.2-1.3% RoA.
• Valuing at 1.1x book on June FY23E.
CAGR: Compound annual growth rate. RoE: Return on Equity.

Positives:
• Core Profit before tax (PBT) up 49% yoy.
• Asset under management (AUM) up 10% yoy.
• NII was up 33% yoy led by 10% yoy AUM growth and sharp margin expansion.
• Calculated NIM expanded 50 bps yoy/30 bps qoq to 2.7% in Q4FY21.
NII: Net Interest Income, NIM: Net Interest Margin. RoA: Return on Assets. EPS: Earning Per share.
Negatives:
• LICHF reported significantly higher-than-expected rise in delinquencies.
• Reported PAT of Rs398.9 cr, down 45% qoq due to sharp qoq rise in provisions.
Click here For detailed report dated 17 June 2021. Note: CMP & valuation may differ due to difference in dates
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Holding Period: 12 months. Disclaimer: http://bit.ly/2n5AxIE
NCC – BUY
Result Update
Rs.87 Rs.105
Our fair value (FV) of Rs.105 offers upside of 20.7% from current levels.
Rationale:
• Mixed Q4 results; revenue beat estimates while margin was below estimates.
• Robust order backlog gives strong revenue growth visibility for the next 2-3 years.
• Optimistic on future order inflows based on positive outlook for infra capex.
• We have cut our FY22-23 earnings estimates in 6%-12% range.
• We arrive at sum of the parts (SoTP) based FV of Rs105, Upgrade to Buy from ADD.

Positives:
• NCC reported 20%/4.6% YoY growth in standalone revenue/profit after tax.
• NCC’s diverse presence, focus on deleveraging, robust order backlog & increased
government capex gives us comfort to maintain positive view.
• Management aims to reduce debt further in FY22 by Rs100-200 cr.
Negatives:
• Operating (EBITDA) margin declined 180bps yoy on higher input cost and Covid.
• Second wave of Covid-19 is expected to impact performance in Q1FY22.
For detailed report dated 31st May 2021. Note: CMP & valuation may differ due to difference in dates
Click here
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Holding Period: 12 months / Disclaimer: http://bit.ly/2n5AxIE
STEEL AUTHORITY OF INDIA (SAIL) – BUY
Initiating Coverage
Rs131 Rs.170
Our fair value of Rs170 offers upside of 29.8% from current market price.
Rationale:
• SAIL is well-positioned to benefit from strong steel up-cycle.
• Expansion projects to drive volume growth and operating leverage.
• Balance sheet has significantly improved and deleveraging should continue.
• Chinese policy changes have structurally elevated steel prices and margins.
• We value SAIL at 5x Mar’23E EBITDA & arrive at a fair value of Rs170. (Earnings Before
Interest, Tax, Depreciation and Amortization).
Initiating Coverage:
Positives:
• Expansion projects should drive 4.4% CAGR in volumes over FY21-24E.
• Strong FCF should reduce leverage from 13x net debt/EBITDA in FY20 to 0.8X in FY22E.
• Iron ore (another cash flows avenue) earnings form 6-10% of SAIL’s EBITDA.
• We expect SAIL’s EBITDA to grow at 10% CAGR over FY21-24E.
Negatives:
• SAIL’s EBITDA/ton of steel is lower than that of peers.
For detailed report dated 24th June 2021. Note: CMP & valuation may differ due to difference in dates.
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Holding Period: 12 Months / Disclaimer: http://bit.ly/2n5AxIE
Dated: 30 June 2021
Sun Pharmaceuticals (SUNP) – ADD
Result Update
Rs. 675 Rs. 740
Our price target of Rs.740 offers upside of 10% from current market price.
Rationale:
• Strong domestic business growth of 13% yoy; Ilumya ramp-up remains on track.
• Specialty ramp up to continue in FY22-23E driving strong earnings growth.
• Continued execution in specialty provides potential for further re-rerating.
• Raise FY22-23E estimates by 4-5% factoring lower marketing spend. Retain ADD
• Risks to specialty business ramp-up receding; Raise multiple to 24X; FV Rs740.
Q4FY21 Result update:

Positives:
• Strong recovery in domestic chronic segment after weak 1HFY21.
• Adj. for one-offs, net profit is 7% above expectation due to lower depreciation.
• Continued specialty ramp-up in FY21 despite Covid impact in 1HFY21.
• Operating leverage to drive profitability over FY22-23E.
Negatives:
• Q4FY21 sales below estimate by 3% due to lower sales across Ex-India segments
• Booked exceptional charge of Rs 670 cr for ongoing antitrust matters.
Click here For detailed report dated 28 May 2021. Note: CMP & valuation may differ due to difference in dates.
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Holding Period – 12 Months; Disclaimer: http://bit.ly/2n5AxIE
RATING SCALE (KOTAK SECURITIES – PRIVATE CLIENT GROUP) / KOTAK INSTITUTIONAL EQUITIES
Definitions of ratings
BUY – We expect the stock to deliver more than 15% returns over the next 12 months
ADD – We expect the stock to deliver 5% - 15% returns over the next 12 months
REDUCE – We expect the stock to deliver -5% - +5% returns over the next 12 months
SELL – We expect the stock to deliver < -5% returns over the next 12 months
NR – Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for
information purposes only.
SUBSCRIBE – We advise investor to subscribe to the IPO.
RS – Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there
is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing,
an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock
and should not be relied upon.
NA – Not Available or Not Applicable. The information is not available for display or is not applicable
NM – Not Meaningful. The information is not meaningful and is therefore excluded.
NOTE – Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark.
FUNDAMENTAL RESEARCH TEAM (PRIVATE CLIENT GROUP)

Rusmik Oza Arun Agarwal Amit Agarwal, CFA Priyesh Babariya
Head of Research Auto & Auto Ancillary Transportation, Paints, FMCG Research Associate
rusmik.oza@kotak.com arun.agarwal@kotak.com agarwal.amit@kotak.com priyesh.babariya@kotak.com
+91 22 6218 6441 +91 22 6218 6443 +91 22 6218 6439 +91 22 6218 6433
Jatin Damania Purvi Shah K. Kathirvelu

Metals & Mining, Midcap Pharmaceuticals Support Executive
jatin.damania@kotak.com purvi.shah@kotak.com k.kathirvelu@kotak.com
+91 22 6218 6440 +91 22 6218 6432 +91 22 6218 6427
Sumit Pokharna Pankaj Kumar

Oil and Gas, Information Tech Midcap
sumit.pokharna@kotak.com pankajr.kumar@kotak.com
+91 22 6218 6438 +91 22 6218 6434
TECHNICAL RESEARCH TEAM (PRIVATE CLIENT GROUP)

Shrikant Chouhan Amol Athawale Sayed Haider
shrikant.chouhan@kotak.com amol.athawale@kotak.com Research Associate
+91 22 6218 5408 +91 20 6620 3350 sayed.haider@kotak.com
+91 22 62185498
DERIVATIVES RESEARCH TEAM (PRIVATE CLIENT GROUP)

Sahaj Agrawal Prashanth Lalu Prasenjit Biswas, CMT, CFTe
sahaj.agrawal@kotak.com prashanth.lalu@kotak.com prasenjit.biswas@kotak.com
+91 79 6607 2231 +91 22 6218 5497 +91 33 6625 9810
Market Strategy
July 2021
Disclosure/Disclaimer (Private Client Group)

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Market Strategy
July 2021
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JULY 2021

Domestic and State of Domestic Receding cases

Valuation & Top Investment

Amit Agarwal, CFA

Outlook and Valuation

Risk & Concerns

 Any sharp rise in bonds yields could result in de-rating of equities.

TOP INVESTMENT IDEAS

Global Indices Performance (in %) – Q1FY22

MSCI World 5.8%

S&P 500 5.8%

S&P BSE SmallCap 14.3%

Source: Bloomberg, Kotak Securities – Private Client Group

Sectoral Indices (% change) – Q1FY22

BSE METAL 31.5%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%

Source: Bloomberg, Kotak Securities – Private Client Group

Commodity Performance (% Change) –Q1FY22

Gold (US$/oz) -7.9%

Copper (US$/ton) -5.3%

Silver (US$/oz) 0.0%

Aluminium (US$/ton) 5.4%

Brent crude (US$/bbl) 11.9%

Richard Bay coal (US$/ton) 22.3%

-35.0% -25.0% -15.0% -5.0% 5.0% 15.0% 25.0% 35.0%

Source: Bloomberg, Kotak Securities – Private Client Group

HCL Technologies (HCLT) – ADD

ICICI Bank (ICICIBC) – BUY

Q4FY21 Earnings update:

LIC Housing Finance (LICHF) – ADD

Q4FY21 Earnings update:

Q4FY21 Earnings update:

STEEL AUTHORITY OF INDIA (SAIL) – BUY

Sun Pharmaceuticals (SUNP) – ADD

Q4FY21 Result update:

FUNDAMENTAL RESEARCH TEAM (PRIVATE CLIENT GROUP)

Jatin Damania Purvi Shah K. Kathirvelu

Sumit Pokharna Pankaj Kumar

TECHNICAL RESEARCH TEAM (PRIVATE CLIENT GROUP)

DERIVATIVES RESEARCH TEAM (PRIVATE CLIENT GROUP)

Disclosure/Disclaimer (Private Client Group)

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